Tim Toohey of Yarra Capital Management argues that the Reserve Bank is misdiagnosing Australia’s inflation problem as primarily one of excess private-sector demand and, as a result, risks keeping monetary policy too tight for too long.
Toohey’s central claim is that while there is indeed excess demand, inflationary pressures are increasingly coming from areas that interest-rate policy cannot effectively control, particularly government-funded sectors and imported inflation, rather than from excessive household spending.
“The household-facing industries make up half the economy. Since mid-2023, demand in those industries has added just 0.05 percentage points a year to economy-wide producer prices”, Toohey wrote.
